Iran’s pain is oil’s gain — for now
As waves of popular unrest grip Iran, traders are starting to see more upside in crude. Prices of benchmark West Texas intermediate and Brent had, by earlier this week, risen more than US$5 from early December, pushing WTI to north of US$60 a barrel and Brent above US$65. Those levels haven’t been seen in nearly two years.
It’s worth pointing out that Iranian demonstrators, who are speaking out against one of the world’s most repressive regimes, have much more important things to worry about than the price of oil (although their grievances, many of them economic, are not unrelated). On a less humanitarian note, it’s worth pointing out that other factors have been supporting oil lately.
The U.S. Energy Information Administration reported that U.S. crude stocks had declined by 4.6 million barrels in the week ending Dec. 22, and a pipeline blast in Libya before Christmas took as much as 100,000 barrels per day offline (though it has since been repaired).
Against that, the North Sea’s Forties pipeline, which shut down on Dec. 11 for a crack, came back online on New Year’s Eve, along with the nearly half-billion barrels of oil it carries from more than 80 fields every day.
Still, it’s pretty clear that the potential impact of the protests in Iran, which shipped threequarters of a billion barrels of crude last year and stands as the third-biggest producer among OPEC countries, has given a lift to oil bulls. On the surface, it’s not hard to see why. The protests are smaller and more confined to far-flung areas than, say, the Green Movement events of 2009, yet should they intensify or spread, or if there is a full-scale coup d’etat in Iran, the country’s 3.8 million barrels of daily production would obviously be threatened — raising visions of US$100 oil again, at least for some analysts.
Still, on the first possibility — supply disruption — we can only note that it hasn’t happened yet. The protests have occurred largely in smaller cities, away from petroleum infrastructure, and analysts are discounting the likelihood of a workers’ strike. So far, at least, none of Iran’s production in the real world has been affected. Still, the potential for disruption has lifted prices — which, ironically, might serve to lower prices in future. The North American shale industry, notably, has proven itself to be amazingly responsive to oil minirallies by ramping up production.
The more extreme possibility is regime change. Popular uprisings are unpredictable by nature, but history and the balance of power suggest Iran is not in for another revolution this time round. For one thing, the theocracy has survived every challenge to its hegemony for nearly 40 years, and it has vast military and police power at its disposal. Should it choose to use those weapons on its own people more forcefully than it already has (dozens killed, hundreds imprisoned), the apparently unorganized protesters — largely working-class, without any clear leadership structure or political organization behind them — do not stand any chance. If they hope to topple Ayatollah Ali Khamenei, they will need much more support from the West than words of encouragement and sympathy.
That brings up one of several wild cards in all this: Donald Trump, who has been tweeting about the protests with typical all-caps enthusiasm. (“TIME FOR A CHANGE!” he posted Wednesday.) The U.S. president has already used the unrest as evidence of the failure of the Iran nuclear deal endorsed by his predecessor, Barack Obama. That deal was supposed to return economic dividends to the Iranian people as international sanctions were suspended. Trump could well segue his Twitter support into a refusal to waive those sanctions when he gets the chance later this month — and if the Iranian government intensifies its crackdown on the protesters, he would have more moral authority to do so.
He would also have some support from the facts, for a change, because when he claims that the Iran nuclear deal has failed the Iranian people, he has a point. Post-sanctions, Iran’s economy has begun to recover, but only after years of hardship aggravated by government fiscal mismanagement. Income inequality and corruption run deep, and now, while oil riches are once again flowing into government coffers, Iran is spending billions fomenting regional instability by funding Shiite forces in other countries while granting hundreds of millions of dollars to domestic religious organizations. Meanwhile, it has implemented fiscal austerity even as Iranians continue to grapple with rampant inflation, a terrible business environment and high unemployment (25 per cent among youth) — not to mention those human rights violations.
Yet another wild card is the regime’s response to the protests. So far, at least, it appears to be trying to walk a fine line between cracking down just hard enough to prevent them growing too fast while exercising just enough restraint so as not to invoke repercussions from the international community, especially the U.S. How long it can hold that line is anybody’s guess.
One potential way out: Iran could try to defuse the protests and avoid further sanctions by throwing its citizens a bone in the form of more spending. How could it pay for that? By pumping more oil — a move that could jeopardize the stability of OPEC’s production controls and serve to depress oil prices in the long term.
Obviously, events are too much in play to call the effects of Iranian unrest on oil markets. Investors seem to be following the geopolitical-risk playbook, assuming that instability in a major oil-producing country is bullish for prices, but time and circumstance might well prove them wrong this time around.